Mortgage Interest Relief

Mortgage interest relief is the mechanism by which the tax system accounts for the finance costs a landlord incurs on a rental property, primarily mortgage interest, but also loan arrangement fees and other costs associated with financing a property purchase or improvement. For individual landlords holding residential property in their own name, the relief was fundamentally restricted by Section 24 of the Finance (No. 2) Act 2015, announced in the July 2015 Budget and fully phased in between April 2017 and April 2020.

How mortgage interest relief worked before Section 24

Before the restriction, mortgage interest was treated as any other business expense: landlords deducted it from rental income before calculating taxable profit. A landlord with £20,000 of annual rental income and £12,000 of mortgage interest would pay tax on £8,000 of profit. For a higher-rate taxpayer (40%), that meant £3,200 of income tax on the net profit, with an effective 40% reduction in the cost of the mortgage interest.

How Section 24 changed it

Under the Section 24 restriction, which has been fully in force since April 2020, individual landlords can no longer deduct mortgage interest from rental income when calculating taxable profit. Instead, they are taxed on their gross rental income and then receive a tax credit equal to 20% of their finance costs, regardless of their actual marginal tax rate.

Using the same example: a landlord with £20,000 of rental income and £12,000 of mortgage interest now pays income tax on the full £20,000. A higher-rate taxpayer (40%) owes £8,000 of tax at the headline level, then receives a credit of 20% of £12,000, that is, £2,400. The net tax bill is £5,600. Under the pre-2020 system it was £3,200. The difference of £2,400 per year represents the direct cost of Section 24 at 40% tax.

For basic-rate taxpayers (20%), the outcome is broadly neutral: taxing on gross income and then applying a 20% credit produces approximately the same result as the old deduction. For higher-rate (40%) and additional-rate (45%) taxpayers, the restriction is a direct and permanent tax increase. There is a further complication: because mortgage interest is no longer deducted before calculating profit, the headline taxable income is higher. This can push landlords into higher tax bands they would not otherwise occupy — a landlord whose real profit is basic-rate can become a higher-rate taxpayer on paper under Section 24, even if their actual cash position has not improved.

Who is affected and who is exempt

Section 24 applies to individual landlords of UK residential property holding in their own name. It does not apply to companies. A limited company can still deduct mortgage interest as a normal business expense before calculating its corporation tax liability, currently 19% on profits below £50,000 and 25% on profits above £250,000. This has made incorporation an increasingly common planning response, particularly for higher-rate taxpayers with larger portfolios, though the costs and complications of incorporation must be weighed carefully.

From 6 April 2025, the Furnished Holiday Letting tax regime was abolished. Until that date, FHL owners were exempt from Section 24 restrictions and could deduct mortgage interest in full. That exemption no longer exists; FHL income is now treated the same as any other residential rental income for Section 24 purposes.

The April 2027 rate change

From 6 April 2027, the government is introducing separate, higher income tax rates on property income: 22% at the basic rate, 42% at the higher rate, and 47% at the additional rate. In line with the new basic rate, the Section 24 mortgage interest credit will also rise from 20% to 22%. For basic-rate landlords this is a marginal improvement in real terms. For higher-rate landlords, however, the picture worsens: they will pay 42% tax on rental income but receive only a 22% credit on mortgage interest, widening the gap compared with the current position. The restriction does not become more generous for highly leveraged higher-rate landlords as a result of this change.

The distinction between what landlords can and cannot deduct is covered in more detail in the non-allowable expenses entry, mortgage interest being the most significant item that moved from the deductible to the non-allowable column.

Landlords calculating the real cost of Section 24 on their portfolio can use the August buy-to-let mortgage calculator to model the impact of different interest rates and leverage levels.

For a full walkthrough, including worked examples at basic and higher rate, the incorporation decision, and how the April 2027 rate changes interact with the credit, see our complete guide to Section 24 tax.

Frequently asked questions

Does Section 24 apply to limited companies?

No. Section 24 applies only to individual landlords holding residential property in their own name. Limited companies are not subject to the restriction and can deduct mortgage interest as a business expense before calculating corporation tax. This difference in treatment has driven a significant increase in the number of landlords incorporating, particularly those in the higher or additional rate tax band with substantial mortgage debt. Whether incorporation makes sense for a specific landlord depends on the overall tax position, the CGT and SDLT costs of any transfer into a company, and the ongoing administrative burden.

What finance costs does Section 24 cover?

Section 24 covers all finance costs related to a residential property letting, not just mortgage interest. This includes loan arrangement and booking fees, interest on loans used to fund improvements to a rental property, and mortgage broker fees. The 20% tax credit applies to the total of these finance costs, not just to the interest component of mortgage payments.

Can unused finance costs be carried forward?

Yes. If the Section 24 tax credit is restricted in a given tax year, because finance costs exceed the property profit or because the credit would create a loss, the unused finance costs carry forward to the following year and are added to that year's finance costs when calculating the credit. This ensures that the credit is not permanently lost if it cannot be fully used in the year it arises.

What happened to FHL mortgage interest relief?

Until 5 April 2025, Furnished Holiday Lettings were exempt from Section 24 and landlords could deduct mortgage interest in full against FHL income. The FHL tax regime was abolished from 6 April 2025, removing this exemption. FHL income is now subject to the same Section 24 restrictions as all other residential rental income.